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Home > Accountancy Viewpoints > Why Accounting Needs To Be More Business-Centric

Accountancy Viewpoints

Why Accounting Needs To Be More Business-Centric

by Andrew Howie

A frequent criticism of the International Financial Reporting Standards (IFRS) approach to accounting standards is that it is too theoretical. What is your view?

There is no doubt that the thrust of IFRS is complicating accounting for companies and making it more complex and more detailed. For the ordinary man in the street, it is making company accounts less easy to understand. The bottom line is that it is costing businesses more money to produce accounts than it used to, and this additional spend is not necessarily generating more clarity. So why are we doing it? This question is very difficult to answer and it is one we hear a lot from clients.

For some of the large, complex businesses there are arguments that IFRS will help such businesses to achieve greater clarity in their financial reporting. There are arguments too that it will force them to provide more disclosure, which might aid the more sophisticated user of accounts. But for smaller, mid-market quoted companies it could be argued that IFRS does not really add anything to the financial statements.

Moreover, the scope and reach of IFRS are being extended. The project has now been going for some time, and when it started it was applicable only to companies listed on the main market of the London Stock Exchange. Then, in 2007, it was extended to companies listed on the Alternative Investment Market (AIM). The next proposal is to implement a more watered-down version of IFRS for all UK companies apart from the very smallest entities. This is likely to become mandatory within the next two to three years and will generate costs for businesses that in the current economic climate they will definitely not wish to bear.

What is involved for the ordinary company in moving to IFRS?

Effectively, you need to convert your accounts to IFRS as a one-off exercise. For typical businesses around the world—those which make up the vast mass of global businesses—this will simply create a cost burden. It is hard to argue that they will derive any business advantage or insights into their business from the exercise.

The one thing that can be said in favor of the global IFRS project is that if you look at it from the perspective of prospective lenders to businesses, one global set of accounting standards that everybody adheres to has to be considered a good thing. One cannot really argue against this. You want to be able to read a set of accounts without having to conduct a tedious exercise to convert from UK Generally Accepted Accounting Principles (GAAP) to US GAAP or Chinese GAAP.

The reality, though, is that any funder who is looking at investing in a company will not just look at a set of accounts. They will want to do proper due diligence on the company. They will want to understand what drives the business. There are a whole set of factors that will determine and shape the lending decision. So while one global set of standards will bring comparability between accounts and between companies in different jurisdictions, it cannot be the be all and end all for end-users, be they funders or shareholders.

Moreover, the direction taken by the standard-setting process is not going to give us one harmonious set of standards, even in the United Kingdom. Instead we are going to end up with a three-tier approach. At the very bottom we will continue to have UK GAAP for the smallest companies. Everyone in the middle will be under the watered-down version of IFRS, and the more complex and larger entities will conform to full IFRS. So, somewhat ironically, even at the end of this massive project you will not have direct comparability across all companies in the United Kingdom.

Of course, that is an impossible target anyway since you cannot compare a small company, or even a mid-market company, with a multinational bank or major oil company. Advancing on the former with principles derived from a massive theoretical exercise in accounting principles focused on the largest companies is unlikely to be particularly helpful.

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Further reading

Books:

  • Branson, Richard. Screw Business as Usual. London: Virgin, 2011.
  • Caan, James. Start Your Business in 7 Days. London: Portfolio Penguin, 2012.
  • Guillebeau, Chris. The $100 Startup: Fire Your Boss, Do What You Love and Work Better to Live More. London: Macmillan, 2012.
  • Patterson, Scott. Dark Pools: High-Speed Traders, A.I. Bandits, and the Threat to the Global Financial System. New York: Crown Business, 2012.
  • Wasmund, Sháá. Stop Talking, Start Doing: A Kick in the Pants in Six Parts. Chichester, UK: Capstone, 2011.

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